One month. That’s all the time there is for bickering European leaders to commit to a drastic financial restructuring of the euro. Otherwise, Douglas McWilliams, special reporter to CNN.com, fears an ugly breakdown of the euro zone economy, piecemeal, at the hands of the markets.
The window of opportunity is narrow. Leaders of Europe must collectively rise to the occasion to save the euro. Though aversion is great, and for good reason, it is Germany’s moment to shine.
An article in The Economist last week called on European governments to implement a “rescue [that will] do four things fast.”
First, Europe needs to clarify which governments need to be labeled as “illiquid” and which as “insolvent.” It is time to stop pretending that Greece will be able to pay back its debt. On an individual basis, remaining solvent is a simple process; don’t overspend. However, things become much more difficult for nations, and especially for the deeply entrenched welfare state (government-provided pensions and subsidies). As evidenced by mass protests in France, England, and Greece, most EU citizens support the welfare state when any program falls into jeopardy, as a way to balance budgets. The French government endured months of strikes in the face of an increased retirement age, and British youth stormed the parliamentary building in London when confronted with increased university tuition fees. However, disaster looms when a significant portion of the population are encompassed by these welfare programs. The state inevitably can no longer meet its financial obligations. This is Greece, now an insolvent country, with Portugal tip-toeing the line. By contrast, Italy and Spain are not “insolvent” but “illiquid.” While their economies have not crumbled, they lack the cash to meet their financial obligations.
Second, European banks must be able to withstand a Greek default and “shore up” their own debt. The EU must create a new round of stress tests for European banks that includes the possibility of a Greek default. While banks in the northern countries may be able to hold their own, others will need assistance from their governments. Likewise, in order to ensure international market stability, the European Central Bank must prove its ability to pay off the 2.5 trillion euros that Italy and Spain owe.
Third, the EU needs to reverse its recent obsession with austerity measures with a change in focus to growth. Countries need to drastically restructure their debt with an emphasis on liberalization and privatization.
Unfortunately, these are big steps that European leaders need to make with a certain degree of cohesion across the continent — and they need to be done quickly.
So is the euro worth saving? Absolutely. Political ramifications aside, getting into the euro zone is easier then getting out. For both weak and strong countries, a drastic upheaval of the financial system is sure to unravel industry and investment alike as a sudden devaluation of euro assets cause significant turmoil. With broken treaties and swinging currency values sweeping the continent, much of the past 50 years worth of work towards a pacified and unified Europe would crumble with the euro. In the end, a costly rescue is more affordable than a euro break-up. But do not assume that all rests on the successes of Greece in climbing out of its current situation.
A Greek default, or even a Greece exit the from the euro zone, would likely not tear apart the euro. It would, however, leave some of the smaller and weaker economies in the zone to question their own stability, and this uncertainty would have ramifications of its own.
German taxpayers will pay the immediate costs of the rescue plan, and the German public would resent this if the European Central Bank begins to back countries and citizens less sensible than themselves. Let’s not forget the French though, as banks there suffer more liabilities in terms of an uncertain Greece. But the cost of a Euro breakup is the entire EU project itself. So, as German Chancellor Angela Merkel said earlier in July, the end of the euro is “unthinkable.”
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